Business

Henry Blodget to Leave Merrill Lynch

By PATRICK McGEEHAN

Published: November 15, 2001

Henry Blodget, the fair-haired stock analyst who became a symbol of the Internet mania that enriched some investors but ultimately cost many others dearly, is giving up the business of publicly rating stocks.

Late Wednesday, he confirmed that he had accepted a buyout offer that his firm, Merrill Lynch ( news/quote ), extended to about 50,000 employees this month.

"It just seemed like a good time to pursue the next thing," Mr. Blodget said.

Mr. Blodget, 35, gained fame among American investors after correctly predicting in 1998 that the share price of Amazon.com ( news/quote ) would soar to $400. But that fame turned to infamy as Amazon and many others among the Internet stocks he recommended plunged. Several companies that Mr. Blodget praised in published reports and television interviews, including Pets.com, a unit of IPET Holdings ( news/quote ), and eToys, failed before ever turning a profit.

Mr. Blodget, a year ago the top- ranked Internet analyst in the influential annual survey by Institutional Investor magazine, fell to a No. 3 ranking this year, and some investors said his stock calls had less resonance in the market.

But Deepak Raj, a managing director who oversees domestic stock research at Merrill, said Mr. Blodget's resignation was not a result of pressure from Merrill's clients or management.

"This is a lifestyle decision for Henry," he said, adding that Mr. Blodget was "a major asset to Merrill Lynch" and would be missed.

After the Internet stock bubble burst, the performance of analysts became the subject of investors' recriminations and securities regulators' scrutiny. Some critics said analysts colored their advice to help their firms win companies' investment banking business; others complained that analysts had become credulous enablers of market madness.

"Henry was typical of the era," said Eric Von der Porten, a hedge- fund manager at Leeward Investments in San Carlos, Calif., who has complained to regulators about Mr. Blodget's methods.

"I rarely saw much questioning of the company's line," he added.

Mr. Blodget, who was married last month, said he planned to spend the next three to six months writing a book for Random House about the Internet stock bubble, then pursue a job at a hedge fund or money management firm.

He said that he would use the book to explain, but not to defend, what happened with Internet stocks and the analysis of them in the last few years.

He had always told investors that Internet stocks carried a high degree of risk, Mr. Blodget said, and that conservative investors should not own them.

"One of the things that happened at the end of the bubble is people forgot about what the downside was, and that's why a lot of people got hurt," he said. "If you go back to any period of time where markets have crashed, it is a messy affair afterward."

Investors, he added, tend to claim that they did not know what they had gotten into.

Merrill and several other firms announced policy changes this year in an attempt to restore confidence in the opinions they present as objective research. Firms, for example, have required analysts to disclose their own stockholdings or have prohibited them from buying shares in companies they follow. The firms also took steps to highlight their investment banking relationships with the companies they follow.

Mr. Blodget's severance package is estimated to be worth about $2 million, but he declined to comment on that.

Earlier this year, Merrill paid an undisclosed amount to settle an arbitration complaint filed by a customer who contended that he had bought shares of InfoSpace ( news/quote ), an online content provider, on Mr. Blodget's recommendation. The customer, Debases Kanjilal, contended that Mr. Blodget's opinion was colored by Merrill's desire to earn investment banking fees from InfoSpace.

Merrill disputed that contention and continued to support Mr. Blodget until the end — assigning him, for example, to cover Microsoft ( news/quote ), one of the world's most widely held stocks.

"We settled solely to avoid the time and distraction of protracted litigation," Mr. Raj said. "Henry's integrity is beyond reproach."

Mr. Raj said Mr. Blodget would stay on at Merrill until the end of the year while the firm decides how to replace him. The only better-known Internet analyst, Mary Meeker — once called the "Queen of the Net" — continues to follow the sector for Morgan Stanley.

Mr. Blodget was once an aspiring journalist — he was a fact checker for Harper's magazine in 1984 — with a history degree from Yale University and no degrees in business. He started out on Wall Street as a junior analyst at CIBC Oppenheimer and was following Internet stocks for that firm in December 1998 when he delivered his career-making $400 call on Amazon.com's stock. Amazon, an online bookseller then considered to epitomize the promise of e- commerce, was selling for $240 a share.

Jonathan Cohen, Merrill's Internet analyst at the time, had just predicted that Amazon could fall to $50. Investors bought the obscure Mr. Blodget's bullish argument and quickly bid the stock past his $400 peg.

Several weeks later, Mr. Cohen had left Merrill, and Mr. Blodget had his job.